2014 is the year of the horse in China. But for the rest of us, it might prove to be the year of China. The country faces a historic turning point: either it will revamp its economic system, deal with some of its growing environmental and social problems and set itself up for another decade of growth and stability that will ensure it becomes the world's largest economy, or 2014 will be the year that the great Chinese miracle hits a serious road bump--with seismic consequences.
People have been making such predictions about China for years, even decades, and the worst has never come to pass. While it has faced formidable challenges--creating a market economy from scratch, building world-class infrastructure, urbanizing hundreds of millions of peasants--Beijing has adjusted its policies along the way and continued to grow at an unprecedented pace.
But this time it feels different. China has built up economic imbalances for some years, and they are not sustainable for much longer. The basic problem is that for almost a decade, China's economic growth has been fueled by cheap credit and government spending--a classic developing-nation problem. Even before the financial crisis of 2008, Beijing's top officials acknowledged that the economy was, in former Premier Wen Jiabao's words, "unstable, unbalanced, uncoordinated and unsustainable." The government needed to stop the flow of easy money to infrastructure, state-owned companies and the housing sector. But this decision was tough to implement, since growth was dependent on easy money. In addition, those getting the money were politically powerful, including state-owned companies and local party bosses.
Then came the financial crisis and the global economic slowdown. But slowing down was not an option for Beijing: the Communist Party's legitimacy derives not from ideology but from competence. So it pursued the world's largest Keynesian response to the crisis, spending over 10% of GDP to keep the economy going. It worked. China's growth rate has averaged more than 9% in the past few years.
But the price has been high. According to a column in the Wall Street Journal by Morgan Stanley's Ruchir Sharma, China's total public and private debt is over 200% of GDP, an unprecedented level for any developing country. Businesses and local governments have piled on debt. Borrowing has fueled a property boom. Without serious policy changes that wean large sectors of the economy off cheap credit relatively soon, this is a bubble that is going to burst and a model that cannot keep performing.
Beijing faces other serious challenges. Chinese people almost anywhere in the country experience serious air and water pollution, and they have begun to complain vocally. They are also increasingly outraged by something almost as ubiquitous: corruption. China's corruption is masked because of the state's tight control of the media, but the Communist Party is well aware of the problem and has pledged to revamp its systems of promotion and party discipline to ensure that officials are less corrupt and more focused on ecological damage, not just growth.